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Indian exporters turn to the
euro
By Indrajit Basu
KOLKATA
- For over a year Indian industry, especially its
exporters - who earn about US$50 billion of foreign
exchange for the country a year and who have depended on
a depreciating rupee for their top line growth for over
the past 10 years - have put on a brave face over the
rising rupee against the dollar.
"We will make
it up through increased exports," they said. And, as per
a not-so-recent statement of L Mansingh,
director-general of the Department of Foreign Trade,
India had reasons to feel optimistic, because "after
all, the industry is restructuring, cutting costs,
getting competitive and all that will result in
increased exports that in turn could offset the
appreciating rupee".
But now, it appears that
India has finally given up. The surge in the rupee
value, which has appreciated by about 4 percent over the
past 13 months, instead of a decade-long trend of a 5
percent depreciation per year, has severely mauled India
Inc, says a study by industry lobby the Federation of
Indian Chambers of Commerce (FICCI).
The study,
covering 100 importers, exporters and banks, said that
the profits of 59 percent of the respondents had been
adversely affected, while 49 percent believed that
recent developments had affected their competitiveness
in the international market.
In order to offset
the negative impact, the companies have taken various
measures, (like further cost cutting measures to
insulate their earnings from the appreciating rupee,
introduction of new systems and mechanisms to improve
their efficiency level and exploring new and untapped
markets), but most significantly, Indian exporters are
shunning dollars to shift to a host of other currencies,
like the euro, yen and the British pound, respectively.
This shift is proving to be more profitable than
just a hedge against a falling dollar. Because while the
rupee continues to rise against the dollar, it is
slipping fast against other major currencies. For
instance, it has lost 27 percent against the euro, 10
percent against the yen and 9 percent against the
British pound in the last year. Moreover, the market
expects the rupee to fall further against these
currencies. Therefore, to an Indian exporter, while
dollar billing reduces revenues by 5 percent, a simple
shift in currency brings about a significant improvement
in the top line as well as the bottom line.
The
FICCI study adds that 77 percent of the respondents were
of the opinion that the rupee would further depreciate
against the euro, which is now emerging as the most
preferred currency for India. Whereas, in view of the
increasing dollar inflows into the country, a strong
current account surplus, higher remittances in the form
of invisibles and a 3-4 percent interest rate
differential between the US and the Indian markets,
coupled with a recession in US, the rupee vis-a-vis the
dollar was likely to continue on its upward trend, the
FICCI said.
Obviously, the industry sector that
is leading this shift is software, which accounts for
over $10 billion out of the country's $50 billion in
exports. Frontline software companies such as Infosys
and Wipro have stated that even a 1 percent appreciation
in the rupee against the dollar could have an impact on
the bottom line to the tune of around 40-50 basis
points. The anticipated range for the rupee by the end
of the current fiscal means that the bottom line of
leading software companies may get squeezed in the range
of 120-170 points in the fiscal 2003-04.
Wipro's
head of treasury K R Lakshminarayana said, "Due to the
diversified revenue base, Wipro has exposures to
multiple currencies, including the dollar, pound
sterling, Japanese Yen and euro." And, adds an Infosys
spokesperson, "Any 1 percent appreciation in the Indian
rupee against the dollar could have an impact of around
40 basis points on profit before tax." Other software
vendors, like Datamatics, Mastek, i-flex and
MphasiS-BFL, have also said that they have started
signing contracts in the local currency of the country
to which they export.
However, the woes of
Indian exporters may not end just yet by shifting away
from the dollar. According to Surjit Bhalla, an
economist known for his radical but often correct
predictions, Indian industry would do well to stick to
the dollar because, he says, "the euro has cyclically
scaled Everest, and now, the only way to go is down."
And along with, it can pull other currencies down.
This is why. According to Bhalla, one of the
primary reasons behind a loosing dollar is the fact that
the US, facing a current account deficit of over 5
percent of its gross domestic product, has been arguing
for a dollar decline for at least a year and a half now,
and, with the US worrying aloud, the foreign exchange
markets have listened - hence the ascent of the euro
from a low of 0.80 in May 2001 to 1.15 to a dollar in
June 2003.
But, says Bhalla, the dream run of
the euro is about to end. "The European Central Bank
mastered the art of undervaluation of its currency by
recording the fastest ever real devaluation in history -
from 1.18 to 0.80, or a real depreciation of more than
30 percent in just 20 months," he says, adding that this
allowed the Europeans to grow faster. But with
globalization forcing companies and countries to
compete, a few percentage points gained by intervening
and nudging the currency markets can mean a big
difference to the countries' bottom lines. "Job losses
occur, and howls for protection are heard," giving
reasons to the central banks to reverse their
intervention and stance pretty quickly.
Therefore, according to Bhalla, although the
euro could advance a few percent from here, the
likelihood of the euro staying at Everest levels on a
sustained basis is very, very low. "Speculation can get
the euro higher, but competitive animal spirits will be
driving the bargain in the other direction. I will bet
that the genuine animal tendencies succeed - they always
do," he adds.
(Copyright 2003 Asia Times Online
Co, Ltd. All rights reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
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